U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
DRAFT 3-26-2002
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (701) 250-3040
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 2002 was $14,594,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2002 was 2,399,170.
Documents incorporated by reference. Portions of the Registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's 2002 annual meeting of stockholders are incorporated by
reference into Part III hereof.
BNCCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................ 3
Item 2 Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........... 10
Item 6. Selected Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 37
Item 8. Financial Statements and Supplementary Data..................... 41
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................ 79
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 79
Item 11. Executive Compensation.......................................... 79
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 79
Item 13. Certain Relationships and Related Transactions.................. 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..................................................... 79
PART I
Item 1.Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a bank holding company
registered under the Bank Holding Company Act of 1956 (the "BHCA") headquartered
in Bismarck, North Dakota. BNCCORP (together with its consolidated subsidiaries,
"BNC" or the "Company") provides a broad range of banking and financial services
to small and mid-size businesses, private banking clients and consumers through
its 18 facilities in North Dakota, Minnesota and Arizona. BNCCORP operates
primarily through its commercial banking subsidiaries, BNC National Bank
(together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC-Minnesota") and BNC National Bank of Arizona
("BNC-Arizona"), together with BNC-Minnesota, the "Banks."
Growth Strategy
BNCCORP was initially established in 1987 with the objective of acquiring
strategically located banks primarily in North Dakota. Since that time, the
banking industry has undergone rapid change. Many non-bank competitors have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availability of a multitude of financial products and services.
Technological advances have improved delivery systems and given customers
immediate access to these products and services. To remain competitive in this
rapidly changing environment, BNCCORP has expanded its products and services as
well as its market areas. The Company is committed to acting as a full-service
provider of financial services, including traditional banking, trust, asset
management, brokerage, insurance, financial planning and other services. See
"-Products and Services."
BNC emphasizes expanded product and service offerings, customer service and
local relationship banking with small and mid-size businesses, private banking
clients and consumers. Management believes that the Company's entrepreneurial
approach to banking and the introduction of new products and services will
continue to attract small and mid-size businesses. Such businesses frequently
have difficulty finding banking services that meet their specific needs and have
sought banking institutions that are more relationship-oriented.
Expansion, mergers and divestitures have played an important role in BNC's
strategy. During the three years ended December 31, 2001, the Company completed
the following transactions: established a new banking subsidiary, BNC-Arizona in
July 2001; merged BNC-North Dakota with and into BNC-Minnesota in November 2000;
and sold its asset-based lending subsidiary, BNC Financial Corporation in
December 1999. See Note 2 to the Consolidated Financial Statements included
under Item 8 of Part II for a summary of these transactions.
Management believes that its increased product and service offerings and
acquisitions have generated significant growth for the Company. BNC's total
assets have increased from $118.0 million at December 31, 1992 to $585.1 million
at December 31, 2001. The Company's goal is the creation of a well-capitalized
$1 billion financial services organization focused on local relationship
banking. Efforts are ongoing to ensure that the executive management team and
operating systems are in place to achieve this goal. BNC will continue to
emphasize internally-generated growth. The Company will also seek growth
opportunities through acquisition of financial services companies or de novo
branching in North and South Dakota, Minnesota, Arizona and, possibly, Iowa,
Nebraska and Wisconsin.
Market Areas
BNC's primary market areas are the Minneapolis/St. Paul (Minnesota) metropolitan
area, the Tempe/Phoenix/ Mesa (Arizona) metropolitan area (where BNC - Arizona
operates from 3 locations in Tempe and Phoenix), the Bismarck/Mandan and Fargo
(North Dakota) metropolitan areas and the rural communities surrounding the
branch offices of BNC - Minnesota (Crosby, Ellendale, Garrison, Kenmare, Linton,
Stanley and Watford City, North Dakota). As of December 31, 2001, 33 percent of
the Company's loans were to borrowers located in Minnesota, 41 percent were to
borrowers located in North Dakota, 8 percent were to borrowers located in South
Dakota, and 16 percent were to borrowers located in Arizona. The remaining 2
percent represents loans to borrowers in other states. Other than brokered
certificates of deposit and direct non-brokered certificates of deposit obtained
through national deposit networks, each banking branch draws most of its
deposits from its general market area. The following table presents total
deposits held and net loans outstanding at each of BNC's locations:
December 31, 2001
-----------------------
Location Total Net Loans
Deposits Outstanding (1)
- ----------------------------- ---------- -----------
(in thousands)
BNC-Minnesota:
Bismarck................. $194,881 $118,973
Crosby................... 18,263 277
Ellendale................ 11,636 655
Fargo.................... 31,815 29,148
Garrison................. 15,570 412
Kenmare.................. 13,955 219
Linton................... 43,966 10,312
Minneapolis.............. 41,218 113,845
Stanley.................. 16,154 832
Watford City............. 11,834 103
BNC-Arizona:
Tempe................... 7,019 37,073
Phoenix................. 1,658 9,453
BNCCORP (parent company)... -- 5
---------- ----------
Total ................ $407,969 $321,307
========== ==========
------------------
(1) Before allowance for credit losses, unearned income and net unamortized
deferred fees and costs.
Products and Services
Loans. The Company's loans primarily consist of commercial and industrial loans,
real estate mortgage loans, real estate construction loans, agricultural loans,
consumer loans and lease financing. In allocating its assets among loans,
investments and other earning assets, BNC attempts to maximize return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
For more information on the lending activities of the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Loan Portfolio" included under Item 7 of Part II.
Interest rates charged on loans may be fixed or variable and vary with the
degree of risk, loan term, underwriting and servicing costs, loan amount and the
extent of other banking relationships maintained with customers. Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations.
Deposits. Each of BNC's bank branches offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market deposits and certificates of deposit. During 2001, the Company
continued to increase core deposits largely through the continued success of its
Wealthbuilder NOW and money market deposit accounts introduced during 1999.
These are competitively priced floating rate accounts with rates variable at
management's discretion. Deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to statutory limits. The Banks also issue brokered
deposits and obtain direct non-brokered certificates of deposit through national
deposit networks when such transactions are beneficial to the Banks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Deposits" included under Item 7 of Part II.
Trust and Financial Services. BNC-Minnesota's Financial Services Division
provides a wide array of trust and other financial services. Such services
include employee benefit and personal trust administration services, financial,
tax, business and estate planning, estate administration, agency accounts,
employee benefit plan design and administration, individual retirement accounts
("IRAs"), including custodial self-directed IRAs, asset management, tax
preparation, accounting and payroll services.
Brokerage Services. BNC-Minnesota's subsidiary, BNC Asset Management, Inc. ("BNC
AMI"), with offices in Bismarck and Fargo, North Dakota and Minneapolis,
Minnesota, provides trading, investment management of institutional and
individual accounts, company-sponsored mutual funds and investment banking.
Insurance Services. Insurance services are provided through the BNC-Minnesota's
subsidiary, BNC Insurance, Inc. ("BNC Insurance"). These services include
personal insurance products such as home, automobile and other vehicle
insurance; universal and mortgage life insurance; business insurance such as
commercial property and general liability, workers' compensation, business
automobile and excess liability coverage; life, health and annuities; farm and
crop insurance; and commercial trucking insurance.
The variety of products and services offered by the Company provides
opportunities to solidify customer relationships by meeting more of the banking
and financial needs of the Company's current customer base. They also present
opportunities to establish new customer relationships in the markets served by
BNC.
Distribution Methods
BNC offers its banking and financial products and services through traditional
industry distribution methods including its network of offices. In addition, the
Company offers 24-hour telephone banking services through its voice response
system, BNC Bankline. The Company also provides internet banking and cash
management services through its internet banking site at www.bncbank.com. This
system allows customers to process account transactions, funds transfers, wires,
automated clearing house "(ACH)" transactions, stop payments and obtain account
history and other information using their personal computers and modems. Mobile
branches operating in Fargo, North Dakota and Tempe, Arizona are also of great
convenience to Bank customers.
Risk Management
The uncertainty of whether events, expected or otherwise, will have an adverse
impact on the Company's capital or earnings is an inevitable component of the
business of banking. To ensure that the risks inherent in BNC's business are
identified, measured, controlled and monitored, the Company has established a
management committee composed of senior management members (the "Management
Committee"). The Management Committee is responsible for determining the desired
risk profile of the Company, allocating resources to the lines of business,
approving major investment programs that are consistent with strategic
priorities and risk appetite and making capital management decisions to
appropriately fund the Company's portfolio of investments. The Management
Committee addresses each of the major risk categories identified by the banking
regulators, if applicable, as well as any additional identified risks inherent
in the Company's business. Such risks include, but are not limited to, credit,
liquidity, interest rate, transaction, compliance, strategic and reputation
risk. In each identified risk area, the Management Committee measures the level
of risk to the Company based on the business it conducts and develops plans to
bring risks within acceptable tolerances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Financial
Condition-Loan Portfolio and-Liquidity, Market and Credit Risk" included under
Item 7 of Part II and "Quantitative and Qualitative Disclosures About Market
Risk," under Item 7a of Part II for further discussion of credit, liquidity and
interest rate risk.
Competition
The deregulation of the banking industry and the increasing availability of
nationwide interstate banking have increased the level of competition in the
Company's already intensely competitive market areas. Competition is encountered
in seeking deposits, obtaining loan customers and in providing all of the other
banking and financial products and services offered by BNC. Principal
competitors include multi-regional financial institutions such as Wells Fargo,
U.S. Bancorp and Community First Bankshares, Inc. as well as large and small
thrifts, independent banks, credit unions and many national and regional
brokerage houses. BNC also competes with other non-bank financial institutions,
including retail stores that maintain their own credit programs and government
agencies that make low cost or guaranteed loans available to certain borrowers.
Some of these competitors have greater resources and lending limits than BNC,
and may offer certain services that BNC does not provide. In addition, some of
the non-bank financial institutions that compete with BNC are not subject to the
extensive federal regulations that govern BNC. Management believes that many
competitors have emphasized retail banking and financial services, leaving the
small and mid-size business market underserved. This has allowed BNC to compete
effectively by emphasizing customer service, establishing long-term customer
relationships and providing services meeting the needs of such businesses and
the individuals associated with them. The banking and financial services
industries are highly competitive, and the future profitability of the Company
will depend on its ability to continue to compete successfully in its market
areas. See "Supervision and Regulation-Recently Enacted Legislation."
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future. See
"-Recently Enacted Legislation."
Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System ("FRB"). BNCCORP is required to file
periodic reports with the FRB and such other reports as the FRB may require
pursuant to the BHCA. The Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP is restricted in its acquisitions, certain of which are subject to
approval by the FRB. A bank holding company may not acquire, or may be required
to give certain notice regarding acquisitions of, companies considered to engage
in activities other than those determined by the FRB to be closely related to
banking or managing banks.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act (the
"Act"), certain restrictions are placed on loans and other extensions of credit
by the Banks to BNCCORP who is defined as an "affiliate" of the Banks under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Banks' transactions with its affiliates.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Restrictions on Loans to One Borrower. Under federal law, permissible loans to
one borrower by banks are generally limited to 15 percent of the bank's
unimpaired capital, surplus, undivided profits and credit loss reserves. The
Banks seek participations to accommodate borrowers whose financing needs exceed
their lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP and the Banks is monitored by
the federal regulatory agencies using a combination of risk-based and leverage
ratios. Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
be required to guarantee a capital restoration plan of the Banks, should the
Banks become "undercapitalized" under capital guidelines. See Note 12 to the
Consolidated Financial Statements included under Item 8 of Part II for further
discussion regarding the capital status of BNCCORP and the Banks.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), the
Banks are encouraged to respond to the credit and other needs of the communities
they serve. Bank performance under the CRA is
periodically tested and the federal bank regulatory agencies consider CRA
ratings in connection with acquisitions involving the change in control of a
financial institution.
Deposit Insurance. FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association Insurance Fund pay insurance
premiums at rates based on their assessment risk classification, which is
determined in part based on the Banks' capital ratios and in part on factors
that the FDIC deems relevant to determine the risk of loss to the insurance
funds.
Cross-Guarantee. The Financial Institutions, Reform, Recovery and Enforcement
Act of 1989 provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any bank subsidiary of a bank holding
company may be required to reimburse the FDIC for any loss or anticipated loss
to the FDIC that arises from a default of any of such holding company's other
subsidiary banks or assistance provided to such an institution in danger of
default.
Support of Banks. Bank holding companies are also subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial" strength for their subsidiary banks.
Conservator and Receivership Powers. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. If the
Banks were placed into conservatorship or receivership, because of the
cross-guarantee provisions of the Federal Deposit Insurance Act, as amended,
BNCCORP, as the sole stockholder of the Banks, would likely lose its investment
in the Banks.
Bank Secrecy Act. The Bank Secrecy Act requires financial institutions to keep
records and file reports that are determined to have a high degree of usefulness
in criminal, tax and regulatory matters, and to implement counter-money
laundering programs and compliance procedures.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Flood Disaster
Protection Act, the Fair Housing Act and the Right to Financial Privacy Act.
These laws mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the "Financial Modernization
Act") has expanded the powers of banks and bank holding companies to sell any
financial product or service, closed the unitary thrift loophole, reformed the
Federal Home Loan Bank ("FHLB") System to increase community banks' access to
loan funding, protected banks from discriminatory state insurance regulation and
established a new framework for the regulation of bank and bank holding company
securities brokerage and underwriting activities. The Financial Modernization
Act also included new provisions in the privacy area, restricting the ability of
financial institutions to share nonpublic personal customer information with
third parties. Throughout 2001, the Company has been reviewing implementing
regulations and other guidance issued by bank regulatory agencies in response to
the Financial Modernization Act and establishing policies, procedures and
programs required or recommended by such regulations and guidelines.
Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. The
agencies' authority has been expanded by federal legislation in recent years. In
addition,
state banking authorities possess significant authority to address violations of
their state's banking laws by banks operating in their respective states by
enforcement and other supervisory actions.
As indicated above, the laws and regulations affecting banks and bank holding
companies are numerous and have changed significantly in recent years. There is
reason to expect that changes will continue in the future, although it is
difficult to predict the outcome of these changes or the impact such changes
will have on BNC.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 2001, BNC had 229 employees, including 219 full-time equivalent
employees. None of BNC's employees is covered by a collective bargaining
agreement and management believes that its relationship with its employees is
good.
Item 2. Properties
The principal offices of BNCCORP are located at 322 East Main Avenue, Bismarck,
North Dakota. The building is owned by BNC National Bank. The principal office
of BNC National Bank is located at 333 South Seventh Street, Minneapolis,
Minnesota. BNC National Bank also owns branch offices at 219 South 3rd Street
and 807 East Century Avenue and an additional office building at 116 North 4th
Street in Bismarck. It also owns its banking facilities in Crosby, Ellendale,
Fargo, Kenmare, Linton and Stanley, North Dakota.
BNC National Bank's facilities at 100 West Main Street (Mandan), Garrison and
Watford City, North Dakota and the land at South 3rd Street (Bismarck) are
leased. The facilities occupied by BNC National Bank and BNC AMI at 333 South
Seventh Street, Minneapolis, Minnesota, and facilities occupied by BNC-Arizona
at 640 and 660 South Mill Avenue, Tempe, Arizona, along with 2725 East Camelback
Road, Phoenix, Arizona are also leased.
All owned and leased properties are considered in good operating condition and
are believed adequate for the Company's present and foreseeable future
operations. BNC does not anticipate any difficulty in leasing additional
suitable space upon expiration of present lease terms. See Note 20 to the
Consolidated Financial Statements included under Item 8 of Part II for
additional information concerning lease and other commitments.
Item 3. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
Periodically, and in the ordinary course of business, various claims and
lawsuits which are incidental to BNC's business may be brought against or by
BNC, such as claims to enforce liens, condemnation proceedings on properties in
which BNC holds security interests, claims involving the making and servicing of
real property loans and other issues incidental to the Company's business. In
the opinion of management, based upon the advice of legal counsel, the
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2001.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
Stock Market under the symbol "BNCC".
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
2002 2001 2000
----------------- ----------------- ------------------
Period High Low High Low High Low
------- ------- ------- ------- -------- --------
First Quarter...... $8.90 $7.28 $8.56 $5.94 $ 7.25 $5.81
Second Quarter..... -- -- 9.50 7.00 6.94 5.88
Third Quarter...... -- -- 9.41 7.51 6.56 5.75
Fourth Quarter..... -- -- 8.45 7.28 6.50 5.38
On March 15, 2002, there were 92 record holders and 996 beneficial owners of the
Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP to pay cash dividends largely depends on the amount of cash
dividends paid to it by the Banks. Capital distributions, including dividends,
by the Banks are subject to federal regulatory restrictions tied to the banks'
earnings and capital. Approval of the OCC, the Banks' principal regulator, would
be required for the Banks to pay dividends in excess of the Banks' earnings
retained in the current year plus retained net profits for the preceding two
years. See "Supervision and Regulation-Dividend Restrictions" included under
Item 1 of Part I.
Item 6. Selected Financial Data
The selected consolidated financial data presented below under the captions
"Income Statement Data" and "Balance Sheet Data" as of and for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 2001, 2000, 1999, 1998 and 1997 and the
related Consolidated Statements of Income, Comprehensive Income, Stockholders'
Equity and Cash Flows for each of the five years in the period ended December
31, 2001 were audited by Arthur Andersen LLP, independent public accountants.
The financial data below should be read in conjunction with and are qualified by
the Consolidated Financial Statements and the notes thereto included under Item
8.
Selected Financial Data (1)
For the Years Ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- -------- --------- ---------
(dollars in thousands, except share and per share data)
Income Statement Data:
Total interest income........ $ 39,201 $ 41,763 $28,931 $ 27,801 $ 25,232
Total interest expense....... 23,544 28,117 16,574 15,152 13,132
-------- --------- -------- --------- --------
Net interest income.......... 15,657 13,646 12,357 12,649 12,100
Provision for credit losses.. 1,699 1,202 1,138 1,201 2,518
Noninterest income........... 8,975 7,773 6,068 4,843 3,928
Noninterest expense.......... 20,833 17,430 18,215 13,379 11,256
Provision for (benefit from)
income taxes.............. 608 906 (399) 1,030 955
-------- --------- -------- --------- --------
Income (loss) from
continuing operations........ $ 1,492 $ 1,881 $ (529) $ 1,882 $ 1,299
======== ========== ======== ========= =========
Balance Sheet Data:
(at end of period)
Total assets................. $585,057 $570,016 $456,877 $372,240 $345,630
Investments and federal
funds sold 226,681 263,185 154,492 96,601 94,624
Loans, net of unearned
income................... 320,791 268,925 262,051 247,181 220,149
Allowance for credit losses.. (4,325) (3,588) (2,872) (2,854) (2,919)
Total deposits............... 407,969 362,464 324,711 284,499 262,824
Short-term borrowings........ 117,960 150,428 88,700 49,290 46,503
Long-term borrowings......... 13 12,642 14,470 9,195 8,285
Guaranteed preferred
beneficial interests in
Company's subordinated
debentures................ 22,244 7,606 -- -- --
Stockholders' equity......... 30,679 29,457 23,149 25,255 23,148
Book value per common share
outstanding.............. $ 12.79 $ 12.30 $ 9.65 $ 10.57 $ 9.64
Earnings Performance Data (1):
Return on average total
assets................... 0.22% 0.35% (0.13)% 0.54% 0.42%
Return on average stockholders'
equity.................... 4.04% 7.68% (2.13)% 8.48% 6.16%
Net interest margin.......... 2.95% 2.72% 3.41% 3.88% 4.27%
Net interest spread.......... 2.51% 2.41% 3.09% 3.43% 3.82%
Basic earnings (loss) per
common share.............. $ 0.62 $ 0.78 $ (0.22) $ 0.79 $ 0.54
Diluted earnings (loss) per
common share................. $ 0.62 $ 0.78 $ (0.22) $ 0.75 $ 0.54
Balance Sheet and Other Key
Ratios (1):
Nonperforming assets to total
assets.................... 0.76% 0.12% 0.63% 1.21% 0.43%
Nonperforming loans to total
loans.................... 1.36% 0.22% 0.63% 0.97% 0.68%
Net loan charge-offs to
average loans............ (0.31)% (0.19)% (0.45)% (0.54)% (0.53)%
Allowance for credit losses
to total loans...........
Allowance for credit losses 1.35% 1.33% 1.10% 1.15% 1.33%
to nonperforming loans... 99% 619% 173% 119% 195%
Average stockholders' equity to
average total assets...... 5.42% 4.56% 6.32% 6.33% 6.89%
- -------------------------
(1) From continuing operations for all periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's financial performance in 2001 reflected continued growth in net
interest income and noninterest income driven by lending opportunities in new
and existing markets and a strategic shift of the earning asset mix from
investment securities to loans. The Company saw continued progress in the growth
of its Wealthbuilder family of NOW and money market deposit products. The
average balance of NOW and money market deposits increased $22.7 million or 17
percent to $159.2 million for 2001 from an average of $136.5 million for 2000.
Net interest income for the year ended December 31, 2001, was $15.7 million, as
compared with $13.6 million and $12.4 million reported in the previous two
years. Noninterest income rose to $9.0 million in 2001 from $7.8 million and
$6.1 million in 2000 and 1999, respectively. In the process of shifting the
earning asset mix to loans from investment securities, in addition to adjusting
the investment portfolio's risk/reward profile in response to the dramatic shift
in interest rates during the year, net realized gains on sales of securities
increased by $1.1 million to $1.4 million in 2001. The increase in net realized
gains on sales of securities accounted for 93 percent of the increase in
noninterest income as insurance commissions, loan fees, brokerage income and
trust and financial services, remained relatively steady in the face of the
challenging national economic environment. Noninterest expense rose to $20.8
million in 2001 from $17.4 million in 2000 reflecting higher salaries and
employee benefits, occupancy, and marketing expense primarily associated with
the Company's establishment of a banking subsidiary in Arizona. In addition,
noninterest expense increased due to the expense associated with the Company's
issuances of trust preferred securities in 2000 and 2001.
The Company recorded 2001 net income of $1.2 million, or $0.51 per share on a
diluted basis, compared to net income of $2.3 million, or $0.96 per share on a
diluted basis for 2000, and net income of $242,000, or $0.10 per share on a
diluted basis for 1999. Income from continuing operations for 2001 was $1.5
million or $0.62 per share on a diluted basis. This compares to $1.9 million, or
$0.78 per share on a diluted basis for 2000 and a loss from continuing
operations of $529,000 or $0.22 per share on a diluted basis in 1999.
Performance highlights in the year 2001 included:
* Loans and leases increased 19 percent, to $320.8 million. In addition
to the 19 percent increase in net loans outstanding, gross loans
originated continued to increase as the total loans sold to other
financial institutions on a nonrecourse basis increased $19.8 million,
or 9%, to $235.8 million.
* Expansion into the Tempe/Phoenix, Arizona marketplace though the
establishment of a banking subsidiary, BNC-Arizona.
* Issuance of $15.0 million in floating rate trust preferred securities
and retirement of the remaining $12.6 million of the Company's 8 5/8
percent subordinated notes due May 31, 2004. See Note 9 "Notes
Payable" and Note 10 "Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures" under Item 8 for further
information related to the Company's trust preferred securities.
* Investment securities decreased 17 percent to $219.2 million from
$263.2 million the prior year reflecting a strategic shift in the
earning asset mix from investment securities to loan opportunities
arising from the Company's new and existing markets.
* Deposits increased 12.6 percent, to $408 million. The deposit growth
was driven by continued success of the Wealthbuilder family of NOW and
money market accounts.
* Noninterest income increased 15.5 percent to $9.0 million.
Results of Operations
Net Interest Income. Net interest income, the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's primary source of earnings. The
amount of net interest income is affected by changes in the volume and mix of
earning assets, the level of rates earned on those assets, the volume and mix of
interest-bearing liabilities and the level of rates paid on those liabilities.
The following table sets forth, for the periods indicated, certain information
relating to BNC's average balance sheet and reflects the yield on average assets
and costs of average liabilities. Such yields and costs are derived by dividing
income and expense by the average balance of assets and liabilities. All average
balances have been derived from monthly averages which are indicative of daily
averages.
Analysis of Average Balances, Interest and Yields/Rates (1)
For the Years ended December 31,
-----------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Interest Average Interest Average Interest Average
Average earned yield of Average earned yield or Average earned yield or
balance or paid cost balance or paid cost balance or paid cost
-------- -------- -------- ------- -------- -------- ------- --------- --------
(dollars in thousands)
Assets
Federal funds sold/interest
bearing due from........ $ 1,830 $ 51 2.79% $ 5,660 $ 242 4.28% $ 1,818 $ 90 4.95%
Taxable investments........ 206,572 12,716 6.16% 225,559 16,054 7.12% 105,145 6,372 6.06%
Tax-exempt investments...... 16,453 829 5.04% 17,624 940 5.33% 7,788 386 4.96%
Loans (2)................... 309,661 25,605 8.27% 255,798 24,527 9.59% 250,158 22,083 8.83%
Allowance for credit losses. (4,153) -- (3,405) -- (2,890) --
-------- -------- -------- -------- ------- --------
Total interest-earning 530,363 39,201 7.39% 501,236 41,763 8.33% 362,019 28,931 7.99%
assets (3)...............
Noninterest-earning assets:
Cash and due from banks.. 11,997 8,939 7,704
Other.................... 25,712 27,579 22,584
-------- -------- --------
Total assets........ $568,072 $537,754 $392,307
======== ======== ========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts............... $159,198 $ 4,987 3.13% $136,450 7,341 5.38% $ 91,671 3,632 3.96%
Savings................... 3,813 57 1.49% 4,097 86 2.10% 6,294 129 2.05%
Certificates of deposit:
Under $100,000............ 104,802 5,631 5.37% 108,170 6,033 5.58% 125,470 6,469 5.16%
$100,000 and over......... 77,140 4,447 5.76% 54,177 3,406 6.29% 43,140 2,307 5.35%
-------- -------- -------- -------- -------- ---------
Total interest-bearing 344,953 15,122 4.38% 302,894 16,866 5.57% 266,575 12,537 4.70%
deposits....................
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased......... 10,206 449 4.40% 97,682 6,326 6.48% 21,685 1,129 5.21%
FHLB notes payable........ 118,705 7,178 6.05% 60,561 3,673 6.07% 40,308 2,174 5.39%
Long-term borrowings........ 8,378 777 9.27% 13,497 1,252 9.28% 9,872 734 7.44%
-------- -------- -------- ------- -------- -------- ---------
Total interest
bearing labilities... 482,242 23,526 4.88% 474,634 28,117 5.92% 338,440 16,574 4.90%
Noninterest-bearing demand
accounts.................. 32,152 28,656 27,094
------- ------- --------
Total deposits and
interest-bearing
liabilities......... 514,394 503,290 365,534
Other noninterest-bearing
liabilities................ 8,766 6,850 5,567
------- ------- --------
Total liabilities.... 523,160 510,140 371,101
Subordinated debentures....... 13,542 3,108 --
Stockholders' equity.......... 31,370 24,506 21,206
------- ------- --------
Total liabilities and
stockholders' equity $568,072 $537,754 $392,307
======== ======== ========
Net interest income........... $15,675 $13,646 $12,357
======= ====== =======
Net interest spread........... 2.51% 2.41% 3.09%
====== ====== ======
Net interest margin........... 2.95% 2.72% 3.41%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............... 109.98% 105.60% 106.97%
======== ======= =======
--------------------
(1) From continuing operations for all periods presented.
(2) Average nonaccrual loans are included in average loans outstanding.
(3) Yields do not include adjustments for tax-exempt interest.
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income (1)
For the Years Ended December 31,
------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
------------------ --------------
Change Due to Change Due to
----------------- --------------
Volume Rate Total Volume Rate Total
--------- ------- ------ ------ ------ --------
(in thousands)
Interest-Earning Assets
Federal funds sold/interest-
bearing due from.......... $ (164) $ (27) $ (191) $ 190 $ (38) $ 152
Investments.................. (1,409) (2,040) (3,449) 7,794 2,442 10,236
Loans........................ 5,165 (4,087) 1,078 498 1,946 2,444
-------- ------- -------- ----- ------- -------
Total increase (decrease)
in interest income......... 3,592 (6,154) (2,562) 8,482 4,350 12,832
-------- ------- -------- ----- ------- -------
Interest-Bearing Liabilities
NOW and money market accounts 1,224 (3,578) (2,354) 1,774 1,935 3,709
Savings...................... (6) (23) (29) (45) 2 (43)
Certificates of Deposit:
Under $100,000............. (188) (214) (402) (892) 456 (436)
$100,000 and over.......... 1,444 (403) 1,041 590 509 1,099
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased....... (5,665) (212) (5,877) 3,957 1,240 5,197
FHLB notes payable......... 3,526 (21) 3,505 1,092 407 1,499
Long-term borrowings......... (475) -- (475) 270 248 518
-------- ------- -------- ----- ------- -------
Total increase (decrease) in
interest expense............. (140) (4,451) (4,591) 6,746 4,797 11,543
======== ======= ======= ====== ======= =======
Increase (decrease) in net
interest income
income.......................$ 3,732 $(1,703) $2,029 $1,736 $ (447) $ 1,289
======== ======= ======= ====== ======= =======
(1) From continuing operations for all periods presented.
Year ended December 31, 2001 compared to year ended December 31, 2000. Net
interest income increased $2.0 million, or 14.7 percent, to $15.6 million as
compared to $13.6 million. Net interest spread and net interest margin increased
to 2.51 and 2.95 percent, respectively. The following condensed information
summarizes the major factors combining to create the changes to net interest
income, spread and margin. Lettered explanations following the summary describe
causes of the changes in these major factors.
Net Interest Income Analysis - 2001 vs. 2000 (1)
For the Years
Ended December 31, Change
31,
------------------ --------------
2001 2000
------- ---------
(amounts in millions)
Total interest income decreased............. $ 39.2 $ 41.8 $ (2.6) (6)%
Due to:
Increase in average earning assets...... $530.4 $ 501.2 $ 29.2 6%
Driven by:
Decrease in average investments (a)..... $223.0 $ 243.2 $ (8)%
Increase in average loans (b)........... $309.7 $ 255.8 $ 53.9 21
The increases in average earning assets
volume were
offset by:
Decreased yield on earning assets....... 7.39% 8.33% (0.94)% (11)%
Driven by:
Decreased yield on loans (c)............ 8.27% 9.59% (1.32)% (14)%
Decreased yield on investments (d)...... 6.07% 6.99% (0.92)% (13)%
These decreases were somewhat offset by:
Mix change in earning asset portfolio -
Average loans as a percent of total
interest-earning assets (e)........... 58% 51% 7% 14%
Total interest expense decreased............ $ 23.5 $ 28.1 $ (4.6) (16)%
Due to:
Increase in average interest-bearing
liabilities............................. $ 482.2 $ 474.6 $ 7.6 2%
Driven by:
Increase in average interest-bearing
deposits (f)............................ $ 345.0 $ 302.9 $ 42.1 14%
Decrease in average borrowings (g)...... $ 137.3 $ 171.7 $(34.3) (20)%
These increases in average interest-
bearing liabilities were offset by:
Decrease in cost of interest-bearing 4.38% 5.57% (1.19)% (21)%
deposits (h)............................
Decrease in cost of borrowings (i)...... 6.12% 6.55% (0.43)% (7)%
- --------------------
(1) From continuing operations for all periods presented.
(a) Reflecting strategic shift in earning asset mix from investment securities
to loans arising from lending opportunities in the Minnesota, North Dakota
and Arizona markets.
(b) Loan growth is attributable to increases in loans originated in the
Minnesota, North Dakota and Arizona markets.
(c) The decreased loan yield is reflective of a 475bp decrease in the prime
rate over the course of 2001 as monetary policy eased in response to
weakening national economic conditions.
(d) The decreased investment yield reflects the lower rate environment in 2001
as well as the reduction in the size of investment portfolio in order to
shift the earning asset mix toward loans.
(e) The decrease in investment securities noted in (a) along with the increase
in average loans noted in (b) caused this change in the mix of the earning
asset portfolio.
(f) Deposit growth is primarily attributable to the continued success of the
Wealthbuilder family of NOW and money market accounts in addition to
increased use of direct non-brokered "National" certificates of deposit
obtained via posting rates on national networks. "National" certificates of
deposit were $34.0 million as of December 31, 2001 compared to $9 million
on December 31, 2000.
(g) Decreased FHLB borrowings due to greater use of "National" certificates of
deposit as a wholesale funding source in order to maintain borrowing
capacity at the FHLB, support the earning asset base, and take advantage of
favorable costs of "National" certificates of deposits relative to FHLB
borrowings. In addition, the Company redeemed the remaining $12.6 million
of its 8 5/8 percent subordinated notes due May 31, 2004 through the
exercise of its call option.
(h) Decreased cost of interest-bearing deposits is reflective of the rise in
volume of Wealthbuilder NOW and money market accounts and the associated
decreases in cost as interest rates declined during 2001. The Wealthbuilder
accounts carry rates that are variable at management's discretion.
Management lowered the rates paid for these deposits in response the
monetary easing that took place during 2001 while maintaining the
competitive nature of the Wealthbuilder products in the Company's various
markets. Additionally, in a lower rate environment, the cost of
certificates of deposit also decreases with renewals and new accounts.
(i) Rates are reflective of the overall decreased rate environment in 2001 as
compared to 2000.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent decreases in the prime rate will negatively impact
interest income and yields on loans but will positively impact interest expense
and the cost of deposits and borrowings.
Many factors, including, but not limited to, the competitive environment in the
markets in which the Company operates, the multitude of financial and investment
products available to the public and the monetary policies of the FRB, can
materially impact the Company's operating results. Therefore, management cannot
predict, with any degree of certainty, prospects for net interest income in
future periods. See "Supervision and Regulation-Monetary Policy" included under
Item 1 of Part I. See also Item 7a, "Quantitative and Qualitative Disclosures
About Market Risk," for information relating to the impact of fluctuating
interest rates on the Company's net interest income.
Year ended December 31, 2000 compared to year ended December 31, 1999. Net
interest income increased $1.3 million, or 10.4 percent, to $13.6 million as
compared to $12.4 million. Net interest spread and net interest margin declined
to 2.41 and 2.72 percent, respectively. The following condensed information
summarizes the major factors combining to create the changes to net interest
income, spread and margin. Lettered explanations following the summary describe
causes of the changes in these major factors:
Net Interest Income Analysis - 2000 vs. 1999 (1)
For the Years
Ended December Change
31,
------------------ ----------------
2000 1999
------- ---------
(amounts in
millions)
Total interest income increased............. $41.8 $ 28.9 $ 12.9 45%
Due to:
Increase in average earning assets...... $501.2 $ 362.0 $ 139.2 38%
Driven by:
Increase in average investments (a)..... $243.2 $ 112.9 $ 130.3 115%
Increase in average loans (b)........... $255.8 $ 250.2 $ 5.6 2%
The increases in average earning assets
volume were coupled with:
Increased yield on earning assets....... 8.33% 7.99% 0.34% 4%
Driven by:
Increased yield on loans (c)............ 9.59% 8.83% 0.76% 9%
Increased yield on investments (d)...... 6.99% 5.98% 1.01% 17%
These increases were somewhat offset by:
Mix change in earning asset portfolio -
Average loans as a percent of total
interest-earning assets (e).. ........ 51% 69% (18)% (26)%
Total interest expense increased............ $ 28.1 $ 16.6 $ 11.5 69%
Due to:
Increase in average interest-bearing
liabilities............................. $474.6 $ 338.4 $ 136.2 40%
Driven by:
Increase in average interest-bearing
deposits (f)............................ $302.9 $ 266.6 $ 36.3 14%
Increase in average borrowings (g)...... $171.7 $ 71.9 $ 99.8 139%
These increases were coupled with:
Increase in cost of interest-bearing 5.57% 4.70% 0.87% 19%
deposits (h)............................
Increase in cost of borrowings (i)...... 6.55% 5.62% 0.93% 17%
- --------------------
(1) From continuing operations for all periods presented.
(a) Reflecting further implementation of the balance sheet leveraging strategy
initiated late in 1999, the Company purchased investment securities and
funded them with FHLB borrowings.
(b) Loan growth is attributable to increases in loans originated in both the
Minnesota and North Dakota markets.
(c) The improved loan yield is reflective of prime rate increases in 2000
offset by some decreases in loan pricing spread to prime rate due to
competitive pressures in all markets.
(d) The improved investment yield reflects the higher rate environment in 2000
as well as the mix of investment types in the Company's investment
portfolio.
(e) The increase in investment securities noted in (a) caused this change in
the mix of the earning asset portfolio. While such a mix change has a
negative effect on yield on earning assets (because investments typically
yield less than loans), the strategy is accretive to earnings.
(f) Deposit growth is primarily attributable to the continued success of the
Wealthbuilder family of NOW and money market accounts.
(g) Increased FHLB borrowings for the purpose of purchasing investment
securities. See (a) above.
(h) Increased cost of interest-bearing deposits is reflective of the volume of
Wealthbuilder NOW and money market accounts and the associated increases in
cost as interest rates rose during 2000. During 2000 and 1999, the
Wealthbuilder accounts were indexed to and floated with the 90 day T-bill
rate. Additionally, in a higher rate environment, the cost of certificates
of deposit also increases with renewals and new accounts.
(i) Rates are reflective of the overall increased rate environment in 2000 as
compared to 1999.
Provision for Credit Losses. Management determines a provision for credit losses
which it considers sufficient to maintain the Company's allowance for credit
losses at a level considered adequate to provide for an estimate of probable
losses related to specifically identified loans as well as probable losses in
the remaining loan and lease portfolio that have been incurred as of each
balance sheet date. See Note 1 to the Consolidated Financial Statements included
under Item 8 and "-Financial Condition-Loan Portfolio-Allowance for Credit
Losses" for further discussion of the components of the allowance for credit
losses and the Company's methodology for assessing the adequacy of the
allowance.
The provision for credit losses for the year ended December 31, 2001 was $1.7
million as compared to $1.2 million in 2000 and $1.1 million in 1999.
Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:
Noninterest Income (1)
Increase (Decrease)
--------------------------------------
For the Years Ended 2001 - 2000 2000 - 1999
December 31,
---------------------------- ----------------- ----------------
2001 2000 1999 $ % $ %
-------- -------- -------- -------- ------- -------- ------
(in thousands)
Fees on loans........ $2,063 $ 1,941 $ 1,435 $ 122 6% (a) $ 506 35% (a)
Insurance commissions 1,891 2,003 2,045 (112) (6)% (b) (42) (2)% (b)
Brokerage income..... 1,407 1,466 797 (59) (4)% (c) 669 84% (c)
Net gain on sales of
securities ........ 1,396 276 198 1,120 406% (d) 78 39%
Trust and financial
services............. 899 1,064 589 (165) (16)% (e) 475 81% (e)
Service charges...... 689 604 536 85 14% (f) 68 13% (f)
Rental income........ 133 56 121 77 138% (65) (54)%
Other................ 497 363 347 134 37% 16 5%
-------- -------- -------- -------- --------
Total noninterest
income............... $8,975 $7,773 $ 6,068 $ 1,202 15% $1,705 28%
======== ======== ======== ======== ========
- --------------------
(1) From continuing operations for all periods presented.
(a) The increase in loan fees for 2001 and 2000 is largely attributable to
loans originated and sold. In 2000, BNC AMI also generated some loan fees
upon placement of credit into the secondary market. Management cannot
predict with any degree of certainty the amount of loans which will be
originated or placed and related loan fees which will be recognized in
future periods.
(b) In 2000, insurance commissions remained relatively stable in spite of a
reduction in the number of insurance agents. In 2001, insurance commissions
experienced a decline in the face of a challenging economic environment.
(c) Increase for 2000 is attributable to the addition of brokerage staff at BNC
AMI and successful efforts to cross-sell brokerage services to bank
customers. In 2001, brokerage income was relatively stable in the face of a
challenging economic environment and a prolonged period of soft conditions
in equity markets.
(d) Net gain on sales of securities increased as a function of selling
investment securities in the process of shifting the earning asset mix from
investment securities to loan opportunities available in new and existing
markets. In addition, given the significant decline in interest rates
during 2001, sales of investment securities were necessary in order to
adjust the forward-looking risk/reward profile of the investment portfolio.
(e) The 2000 increase is attributable to fees associated with the BNC U.S.
Opportunities Fund, LLC which was formed on September 1, 1999 and is
managed by the BNC-Minnesota's Financial Services Division. In 2001, the
fees from the BNC U.S. Opportunities Fund, LLC decreased as the fees are a
function of the asset size of the fund. The fund's asset size was
negatively impacted by the overall decline in equity markets.
(f) Service charges increased in 2001 and 2000 as the Company continued to
increase its Wealthbuilder NOW and money market volume along with an
increase in non-interest bearing deposits which are primarily business
deposit relationships that tend to utilize a greater level of fee-based
deposit services.
Noninterest Expense. The following table presents, for the periods indicated,
the major categories of the Company's noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:
Noninterest Expense (1)
Increase (Decrease)
-------------------------------------
For the Years Ended
December 31, 2001 - 2000 2000 - 1999
--------------------------- ------------------- -----------------
2001 2000 1999 $ % $ %
-------- ------- ------- --------- -------- -------- -------
(in thousands)
Salaries and employee
benefits...............$10,355 $ 8,891 $ 8,854 $ 1,464 16% (a) $ 37 --
Occupancy................. 1,925 1,360 1,248 565 42% (b) 112 9%
Depreciation and
amortization.............. 1,846 1,659 1,586 187 11% 73 5%
Minority interest in
income of subsidiaries... 1,377 399 -- 978 245% (c) 399 -- (c)
Professional services..... 1,349 1,290 1,214 59 5% 76 6%
Office supplies,
telephone and postage 1,001 940 941 61 6% (1) --
Marketing and promotion... 877 597 621 280 47% (d) (24) (4)%
FDIC and other assessments 193 200 191 (7) (4)% 9 5%
Repossessed and impaired
asset expenses/write-offs 141 470 2,271 (329) (70)% (e) (1,801) (79%) (e)
Other..................... 1,769 1,624 1,289 145 9% 335 26% (f)
-------- ------- ------- --------- --------
Total noninterest
expense..................$20,833 $17,430 $18,215 $ 3,403 20% $ (785) (4)%
======== ======= ======= ========= ========
Efficiency ratio (g)...... 84.57% 81.38% 98.86% 3.19% (17.48)%
- --------------------
(1) From continuing operations for all periods presented.
(a) 2001 increase reflects additions to personnel associated with the Company's
establishment of a banking subsidiary in Arizona along with additional
personnel in the Minneapolis market.
(b) Increase in 2001 associated with new facilities due to the establishment of
a banking subsidiary in Arizona, along with recording a full year's
occupancy expense for BNC - Minnesota's Fargo, North Dakota branch.
(c) This is the interest expense associated with the trust preferred securities
issued in July 2000 and the additional interest expense from the floating
rate trust preferred securities issued in July 2001. The increase in 2001
reflects a the full year expense of the July 2000 issue along with five
months of expense on the July 2001 issuance. See Note 10 to the
Consolidated Financial Statements included under Item 8 for further
information related to the Company's trust preferred offerings.
(d) Increased marketing costs reflecting development of the Company's new
markets in Arizona and Fargo, North Dakota.
(e) 1999 included write-downs to estimated net realizability of other real
estate owned and repossessed assets. The Company had no assets classified
as other real estate owned at December 31, 2001 and repossessed assets were
valued at $84,000.
(f) Increase in 2000 represents a number of immaterial increases in various
miscellaneous expense categories.
(g) Noninterest expense divided by an amount equal to net interest income plus
noninterest income. Noninterest expense for 2000 and 1999 included $470,000
and $2.3 million, respectively, in write-downs of nonperforming assets.
Excluding these write-downs and the interest on the trust preferred
securities, the efficiency ratios for 2000 and 1999 would have been 77.30
and 86.53 percent, respectively.
Financial Condition
Overview. Although subsequent sections of this discussion and analysis of
financial condition address certain aspects of the Company's major assets and
liabilities in significant detail, the following two tables are presented as a
general overview of the financial condition of the Company.
The following table presents the Company's assets by category as of December 31,
2001, 2000 and 1999, as well as the amount and percent of change between the
dates. Material changes are discussed in lettered notes following the table
(amounts are in thousands):
Assets
Increase (Decrease)
-------------------------------------
As of December 31, 2001 - 2000 2000 - 1999
---------------------------- ---------------- -----------------
2001 2000 1999 $ % $ %
------- -------- -------- ------ ------ -------- ------
Cash and due from
banks............... $16,346 $ 14,988 $ 12,816 $1,358 9% $ 2,172 17%
Interest-bearing
deposits with banks 126 595 5,565 (469) (79)% (4,970) (89)%
Federal funds sold.. 7,500 -- 3,500 7,500 100% (3,500) (100)%
Investment
securities
available for sale. 219,181 263,185 150,992 (44,004) (17)% (a) 112,193 74% (a)
Loans and leases, net 316,466 265,337 259,179 51,129 19% (b) 6,158 2% (b)
Premises, leasehold
improvements and
equipment, net..... 15,403 14,873 12,006 530 4% 2,867 24%
Interest receivable. 3,008 3,854 2,613 (846) (22)% 1,241 47%
Other assets........ 4,856 4,465 6,945 391 9% (2,480) (36)%
Deferred changes and
intangible assets,
net................ 2,171 2,719 3,261 (548) (20)% (542) (17)%
-------- --------- -------- -------- ---------
Total assets.... $585,057 $570,016 $456,877 $15,041 3% $113,139 25%
======== ========= ======== ======== =========
(a) The Company implemented a balance sheet leveraging strategy beginning late
in 1999 whereby the earning asset portfolio was increased through the
purchase of additional investment securities funded primarily by borrowings
from the FHLB. In 2001, the Company began to strategically shift the larger
earning asset base to loans from investment securities.
(b) In 2001, the Company increased its net loans and leases by strategically
shifting its earning asset mix toward loans from investment securities. The
increase in net loans and leases reflected commercial real estate and real
estate construction loans arising from opportunities primarily in the
Arizona and Minnesota markets. The 2000 increase is primarily attributable
to an increase in real estate construction loans. Although net loans
outstanding did not increase materially, gross loans originated by the
Company increased significantly in 2000 as the Company originated and sold
portions of loans to other lenders on a nonrecourse basis. Loans may be
sold to accommodate customers whose financing needs exceed legal lending
limits and/or internal loan restrictions relating primarily to industry
concentrations. Outstanding balances of loan participations sold on a
nonrecourse basis were $235.8, $216.0, and $148.7 million, respectively, as
of December 31, 2001, 2000 and 1999.
The following table presents the Company's liabilities, guaranteed preferred
beneficial interests in subordinated debentures and stockholders' equity by
category as of December 31, 2001, 2000 and 1999, as well as the amount and
percent of change between the dates. Material changes are discussed in lettered
notes following the table (amounts are in thousands):
Liabilities, Subordinated Debentures and Stockholders' Equity
Increase (Decrease)
--------------------------------------
As of December 31, 2001 - 2001 2000 - 1999
----------------------------- ----------------- ------------------
2001 2000 1999 $ % $ %
-------- --------- -------- -------- ------- --------- --------
Deposits:
Noninterest-bearing. $ 43,055 $ 31,459 $ 29,798 $11,596 37% (a) $ 1,661 6%
Interest-bearing -
Savings, NOW and
money market..... 170,653 169,425 127,454 1,228 1% 41,971 33% (b)
Time deposits
$100,000 and over 83,809 61,720 46,779 22,089 36% (c) 14,941 32% (c)
Other time deposits 110,452 99,860 120,680 10,592 11% (b) (20,820) (17)% (b)
Short term borrowings 117,960 150,428 88,700 (32,468) (22)% (d) 61,728 70% (d)
Long term borrowings 13 12,642 14,470 (12,629) (100)% (e) (1,828) (13)%
Other liabilities... 6,192 7,419 5,847 (1,227) (17)% 1,572 27%
--------- --------- -------- -------- ---------
Total liabilities 532,134 532,953 433,728 (819) -- 99,255 23%
Guaranteed preferred
beneficial interest
in Company's
subordinated
debentures......... 22,244 7,606 -- 14,638 192% (f) 7,606 -- (f)
Stockholders' equity 30,679 29,457 23,149 1,222 4% (g) 6,308 27% (g)
--------- --------- --------- -------- ---------
Total........... $585,057 $570,016 $456,877 $15,041 3% $113,139 25%
========= ========= ========= ======== =========
(a) Noninterest-bearing deposits can fluctuate significantly on a daily basis
due to transactions associated primarily with commercial customers.
(b) Increases in the "savings, NOW and money market" category are attributable
to the popularity of the Company's Wealthbuilder deposit products. Success
of these products has also contributed to a decrease in the "other time
deposits" category as some customers have elected to transfer maturing time
deposits to the more liquid and competitively priced Wealthbuilder
products. During 2001, the "other time deposits" category increased due to
certain special promotions in select markets.
(c) Brokered deposits totaled $34.4 million at December 31, 2001 compared to
$30.7 and $13.4 million at December 31, 2000 and 1999, respectively.
"National" certificates of deposit increased to $34.0 million at December
31, 2001 compared to $9 million at December 31, 2000 due to greater use of
"National" certificates of deposit as a wholesale funding source in order
to maintain borrowing capacity at the FHLB and take advantage of favorable
costs of "National" certificates of deposits relative to FHLB borrowings.
(d) Increases in short term borrowings for 2000 are attributable to the balance
sheet leveraging strategy. Decrease in 2001 reflects a reduction in FHLB
borrowings resulting from a decrease in the size of the Company's
investment securities portfolio as well as a shift to greater use of
"National" certificates of deposit as a wholesale funding source as
described above.
(e) On August 31, 2001, the Company retired its remaining 8 5/8 percent
subordinated notes due May 31, 2004 through exercise of its call option by
using a portion of the proceeds from the issuance of floating rate trust
preferred securities in July 2001.
(f) Issuance of trust preferred securities in July 2000 and floating rate trust
preferred securities in July 2001. See Note 10 to the Consolidated
Financial Statements included under Item 8 for further information related
to the Company's trust preferred securities.
(g) Increase for 2001 is due to earnings of $1.2 million. Increase for 2000 is
attributable to earnings of $2.3 million and unrealized holding gains on
securities available for sale arising during the period of $3.9 million.
Investment Securities. BNC's investment policy is designed to enhance net income
and return on equity through prudent management of risk, ensure liquidity for
cash-flow requirements, help manage interest rate risk, ensure collateral is
available for public deposits, advances and repurchase agreements and manage
asset diversification. In managing the portfolio, the Company seeks a balance
among yield and the management of credit and liquidity risks with a goal of
maximizing the longer-term overall profitability of the Company.
Investments are centrally managed in order to maximize compliance (federal laws
and regulations place certain restrictions on the amounts and types of
investments BNC may hold) and effectiveness of overall investing activities. The
primary goal of BNC's investment policy is to contribute to the overall
profitability of the Company. The objective is to purchase and own securities
and combinations of securities with good risk/reward characteristics. "Good"
risk/reward securities are those identified through thorough analysis of the
cash flows and potential cash flows as well as market value and potential future
market value of the security in question given various interest rate scenarios.
Investment strategies are developed in light of constant view of the Company's
overall asset/liability position. As it relates to investment strategies, the
focus of the Asset/Liability management committee is to determine the impact of
interest-rate changes on both future income and market value of securities in
the portfolio. See Item 7A, "Quantitative and Qualitative Disclosures about
Market Risk," for additional information relating to the impact of fluctuating
interest rates on the Company's net interest income.
The following table presents the composition of the investment portfolio by
major category as of the dates indicated:
Investment Portfolio Composition (1)
December 31,
--------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
Estimated Estimated Estimated
Amortized fair Amortized fair Amortized fair
cost market cost market cost market
value value value
--------- --------- --------- --------- --------- ---------
(in thousands)
Available for Sale:
U.S. government
agency
mortgage-backed
securities......... $ 42,027 $ 41,946 $ 44,272 $ 44,468 $ 26,697 $ 26,295
U.S. government
agency securities.. 4,396 4,495 4,880 4,890 4,654 4,468
Collateralized
mortgage
obligations........ 135,423 137,268 164,221 165,404 97,243 95,038
State and municipal
bonds 16,952 17,481 20,782 20,905 20,272 19,548
Corporate bonds...... 10,329 10,611 16,968 17,899 -- --
Equity securities.... 7,380 7,380 9,619 9,619 5,643 5,643
--------- --------- --------- --------- --------- ---------
Total investments.... $216,507 $219,181 $260,742 $263,185 $154,509 $150,992
========= ========= ========= ========= ========= =========
(1) From continuing operations for all periods presented.
The following table presents maturities for all securities available for sale
(other than equity securities) and yields for all securities in the Company's
investment portfolio at December 31, 2001:
Investment Portfolio - Maturity and Yields
Maturing
-----------------------------------------------------------
After 1 but After 5 but
Within 1 within 5 within 10 After 10 Total
year years years years
------------- ------------- -------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(1) (1) (1) (1) (1)
------ ----- ------ ------ ------- ------ -------- ------ ------- ------
Available for
sale: (2)
===================
U.S. government
agency
mortgage-backed
securities (3).. $ 16 5.86% $ -- -- $ 3,234 6.37% $ 38,777 6.12% $ 42,027 6.13%
U.S. government
agency
securities...... -- -- 927 11.21% -- -- 3,469 6.04% 4,396 7.13%
Collateralized
mortgage
obligations (3). 494 5.83% 4,960 6.53% $24,836 5.34% $105,133 5.42% 135,423 5.45%
State and
municipal bonds... -- -- 15 13.18% 293 7.25% 16,644 7.28% 16,952 7.28%
Corporate bonds... -- -- -- -- 1,000 7.50% 9,329 8.27% 10,329 8.19%
------ ------ ------- ------ -------
Total book value
of investment
securities...... $ 510 5.84% $5,902 7.28% $29,363 5.54% $173,352 5.92% 209,127 5.91%
====== ====== ======= ======== -------
Unrealized
holding gain on
securities
available for
sale................ 2,674
Equity securities..... 7,380 2.58%
-------
Total investment
in securities
available for
sale................ $219,181 5.73% (4)
=======
- --------------------
(1) Yields include adjustments for tax-exempt income; yields do not reflect
changes in fair value that are reflected as a separate component of
stockholders' equity (except as noted in (4) below).
(2) Based on amortized cost/book value.
(3) Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4) Yield reflects changes in fair value that are reflected as a separate
component of stockholders' equity.
As of December 31, 2001, BNC had $219.2 million of securities in the investment
portfolio as compared to $263.2 and $151.0 million at December 31, 2000 and
1999, respectively. As part of the strategic shift in the earning asset mix from
investment securities to loans, the Company decreased its holdings in
collateralized mortgage obligations, corporate bonds, and state and municipal
bonds by $28.1, $7.3 and $3.4 million respectively. Equity securities decreased
by $2.2 million as the Company was required to hold less stock in the Federal
Home Loan Bank of Des Moines as a result of a decrease in its FHLB borrowings.
In addition, as a result of 475bp of monetary easing over the course of 2001,
the yield curve experienced a significant downward shift and increase in slope
relative to 2000. The ongoing portfolio management process and individual
security risk/reward analysis described above led to the sale of individual
securities whose forward-looking risk/reward profile given various interest rate
scenarios was inferior to other securities available for purchase. The need to
optimize the risk/reward profile of the portfolio as a whole in addition to the
reduction in the portfolio size as more earning assets were shifted to loans
resulted in transactions that generated net realized securities gains of $1.4
million.
During 2000, the Company had increased its holdings in collateralized mortgage
obligations ("CMOs"), U.S. government agency mortgage-backed securities and
corporate bonds by $70.4, $18.2 and $17.9 million, respectively as part of the
Company's strategy to increase its earning asset portfolio by purchasing
investment securities primarily funded through FHLB borrowings. The portfolio
management process, investment
objectives, and risk/reward analysis described above led the increase in the
investment portfolio to be over-weighted toward CMOs due to their risk/reward
characteristics. In addition, over the course of 2000, principal cash flows were
primarily reinvested in CMOs because they offered a better risk/reward profile
(due to the structure of the CMO cash flows) relative to mortgage-backed
securities.
At December 31, 2001, BNC held no securities of any single issuer, other than
U.S. government agency securities and agency mortgage-backed securities and
CMOs, that exceeded ten percent of stockholders' equity. A significant portion
of the Company's investment securities portfolio (approximately 85 percent at
December 31, 2001) was pledged as collateral for public deposits and borrowings,
including borrowings with the FHLB.
Loan Portfolio. The Company's primary source of income is interest earned on
loans. Net loans increased $51.1 million, or 19 percent, to $316.5 million at
December 31, 2001 as compared to $265.3 million at December 31, 2000. In 2000,
net loans increased $6.2 million, or 2.4 percent, as compared to December 31,
1999. The following table presents the composition of the Company's loan
portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- ----------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ ------- ------- -------- ------ -------- ------- -------- -------
(dollars in thousands)
Commercial and
industrial ......... $109,143 34.5 $112,407 42.4 $111,236 42.9 $107,886 44.2 $ 96,780 44.5
Real estate mortgage 136,219 43.0 90,622 34.2 91,906 35.5 76,692 31.4 56,408 26.0
Real estate 34,872 11.0 25,301 9.6 16,026 6.2 20,831 8.5 18,215 8.4
construction........
Agricultural........ 19,810 6.3 15,775 5.9 16,679 6.4 19,777 8.1 21,064 9.7
Consumer/other...... 13,685 4.3 14,888 5.6 15,116 5.8 14,761 6.1 18,726 8.6
Lease financing..... 7,578 2.4 10,202 3.8 11,307 4.4 7,422 3.0 9,211 4.2
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Total face amount
of loans............ 321,307 101.5 269,195 101.5 262,270 101.2 247,369 101.3 220,404 101.4
Unearned income and
net unamortized
deferred fees and
costs............. (516) (0.1) (270) (0.1) (219) (0.1) (188) (0.1) (255) (0.1)
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Loans, net of
unearned income
and unamortized
fees and costs.... 320,791 101.4 268,925 101.4 262,051 101.1 247,181 101.2 220,149 101.3
Less allowance for
credit losses.... (4,325) (1.4) (3,588) (1.4) (2,872) (1.1) (2,854) (1.2) (2,919) (1.3)
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Net loans........... $316,466 100.0 $265,337 100.0 $259,179 100.0 $244,327 100.0 $217,230 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) From continuing operations for all periods presented.
The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in the Company's loan portfolio. Material
changes are discussed in lettered explanations below the table:
Change in Loan Portfolio Composition (1)
Increase (Decrease)
-----------------------------------------------
2001 - 2000 2000 - 1999
---------------------- ---------------------
$ % $ %
----------- --------- ---------- ---------
(dollars in thousands)
Commercial and industrial.. $ (3,264) (3)% $ 1,171 1%
Real estate mortgage....... 45,597 50% (a) (1,284) (1)%
Real estate construction... 9,571 38% (b) 9,275 58%
Agricultural............... 4,035 26% (904) (5)%
Consumer/other............. (1,203) (8)% (228) (2)%
Lease financing............. (2,624) (26)% (1,105) (10)%
----------- ----------
Total face amount of loans. 52,112 19% 6,925 3%
Unearned income/unamortized
fees and costs........... (246) (91)% (51) (23)%
----------- ----------
Loans, net of unearned 51,866 19% 6,874 3%
income/unamortized fees
and costs................
Allowance for credit losses (737) (21)% (716) (25)%
----------- ----------
Net Loans.................. $ 51,129 19% (c) $ 6,158 2%(c)
=========== ==========
(1) From continuing operations for all periods presented.
(a) Increase in 2001 is attributable to commercial real estate loan volume
generated out of Minnesota, Arizona, and North Dakota.
(b) Increased originations of commercial real estate construction loans
primarily in the Minnesota and Arizona markets.
(c) Net loans outstanding did not increase significantly in 2000 although the
Company generated and sold a significant volume of loans during the year.
During 2001, the Company increased its net loans $51.1 million or 19
percent as part of a strategic shift in the earning asset mix from
investment securities to loans, primarily commercial real estate loans.
Despite the solid rise in net loans in 2001, the increase in net loans
presented in the above table for the prior 24 months is not reflective of
the business generated by the Company. Loans originated were $533.5 million
at December 31, 2001 compared with $459.0 and $382.4 million at December
31, 2000 and 1999, respectively. Loans are originated and sold primarily
for legal lending limit and industry concentration reasons.
While prospects for continued loan growth appear favorable, management cannot
predict with any degree of certainty the Company's future loan growth potential.
Credit Policy and Approval Procedures. BNC follows a uniform credit policy that
sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management. Credit committees may be
established at either the Bank or corporate level. The loan policy is reviewed
and reaffirmed by the Board at least annually. Underwriting criteria are based
upon the risks associated with each type of credit offered, the related
borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the credit committees based on the size of the customer's credit
relationship with BNC. All loans and commitments approved in excess of $300,000
are presented to the Board on a monthly basis for summary review. Any exceptions
to loan policies and guidelines, to the extent the credit relationship amount
exceeds individual loan officer lending authorities, are subject to special
approval by the Banks' Chief Credit Officer or the Executive Credit Committee.
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of the Banks' legal lending limits (except to the extent collateralized
by U.S. Treasury securities or Bank deposits and, accordingly, excluded from the
Banks' legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks sells loan participations to outside
participants without recourse. Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
Loan Participations Sold (1)
December 31,
- -----------------------------------
(in thousands)
2001........... $212,167
2000........... 189,763
1999........... 120,100
1998........... 56,700
1997........... 65,800
(1) From continuing operations for all periods presented.
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. Many of the loans sold
by the Banks are commercial lines of credit for which balances and related
payment streams cannot be reasonably estimated in order to determine the fair
value of the servicing rights and/or future interest income retained by the
Banks. See Note 1 to the Consolidated Financial Statements included under Item 8
for further discussion of accounting policies related to loans. Management
cannot reliably predict BNC's ability to continue to generate or sell loan
participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 2001 the
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 2001, the Company identified three concentrations
of loans exceeding ten percent of total loans and loan commitments outstanding.
These concentrations were in real estate, lodging places and construction, which
represented 25.1, 11.2 and 12.1 percent, respectively, of total loans and loan
commitments outstanding.
The real estate loans and commitments were extended to 136 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
Number of outstanding
customers loans and
loan
commitments
------------- --------------
Non-residential and apartment
building operators,
developers and lessors of
real property................ 81 18.8%
Real estate holding companies.. 55 6.3%
------------- --------------
Total..................... 136 25.1%
============= ==============
The lodging loans and commitments were extended to 23 customers whose properties
are located throughout the United States. Loans in this category are made
primarily to borrowers that have seasoned hotel portfolios that are well
diversified by location, property type and chain.
Loans and commitments in the construction category were extended to 76 customers
who are located primarily in Minnesota, Iowa and North and South Dakota and who
can be generally categorized as indicated below:
Percent of
total
Number of outstanding
customers loans and
loan
commitments
------------- -------------
General building contractors....... 33 8.3%
Heavy construction, excluding
building........................... 18 3.0%
Special trade contractors.......... 25 .8%
------------- -------------
Total......................... 76 12.1%
============= =============
The contractors are involved in various aspects of the construction industry,
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions.
Agricultural Loans. BNC's agricultural loan portfolio totals approximately $19.8
million, or 6.3 percent of total loans. Within the portfolio, loans are
diversified by type and include loans to grain and/or livestock producers,
agricultural real estate loans, machinery and equipment and other types of
loans. The majority of the Company's agricultural loans are extended to
borrowers located in North Dakota, and are diversified over several counties. As
of December 31, 2001, there were no agricultural loans classified as
nonperforming.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 2001. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
Maturities of Loans (1)
Over 1 year
through 5 years Over 5 years
------------------- ------------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
-------- -------- --------- --------- -------- ---------
(in thousands)
Commercial and
industrial............$ 43,970 $23,038 $33,692 $ 1,588 $ 6,855 $109,143
Real estate mortgage.... 28,874 23,015 43,979 26,861 13,490 136,219
Real estate construction 20,110 235 14,527 -- -- 34,872
Agricultural............ 11,412 3,559 1,787 1,100 1,952 19,810
Consumer/other.......... 7,156 3,472 2,671 386 -- 13,685
Lease financing......... 328 6,911 -- 339 -- 7,578
-------- -------- --------- --------- -------- ---------
Total face amount of
loans...................$111,850 $60,230 $ 96,656 $ 30,274 $22,297 $321,307
======== ======== ========= ========= ======== =========
- --------------------
(1) Maturities are based upon contractual maturities. Floating rate loans
include loans that would reprice prior to maturity if base rates change.
See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk,"
for further discussion regarding repricing of loans and other assets.
Interest Rate Caps and Floors. From time to time the Company may use
off-balance-sheet instruments, principally interest rate caps and floors, to
adjust the interest rate sensitivity of on-balance-sheet items, including loans.
See -"Liquidity, Market and Credit Risk," Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk," and Notes 1 and 14 to the Consolidated Financial
Statements included under Item 8 for further discussion about accounting
policies applicable to derivative financial instruments and currently
outstanding instruments.
Nonperforming Loans and Assets. BNC's lending personnel are responsible for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends, to a substantial extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner. Lenders are not compensated for
growth at the expense of credit quality. Loan officers are responsible for
regular reviews of past due loans in their respective portfolios. The loan
portfolio is also monitored regularly and examined by the Company's loan review
personnel. Loans demonstrating weaknesses are downgraded in a timely fashion and
the Board receives a listing of all such loans on a monthly basis.
The following table sets forth, as of the dates indicated, the amounts of
nonperforming loans and other assets, the allowance for credit losses and
certain related ratios:
Nonperforming Assets (1)
December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest.... $ 983 $ 221 $ 22 $ 307 $ 1,016
Nonaccrual loans (2) (3) (4)..... 3,391 343 1,620 2,042 376
Restructured loans (2) (3)....... 5 16 16 44 104
-------- -------- ------- ------- --------
Total nonperforming loans..... 4,379 580 1,658 2,393 1,496
Other real estate owned and
repossessed assets............... 70 84 1,207 2,112 --
-------- -------- ------- ------- --------
Total nonperforming assets.... $ 4,449 $ 664 $2,865 $4,505 $ 1,496
======== ======== ======= ======= ========
Allowance for credit losses......... $ 4,325 $ 3,588 $2,872 $2,854 $ 2,919
======== ======== ======= ======= ========
Ratio of total nonperforming loans 1.36% .22% .63% .97% .68%
to total loans......................
Ratio of total nonperforming assets .76% .12% .63% 1.21% .43%
to total assets
- --------------------
(1) From continuing operations for all periods presented.
(2) If the Company's nonaccrual and restructured loans had been current in
accordance with their original terms, BNC would have recognized additional
interest income of $84,000, $29,000 and $112,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
(3) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $3,000, $6,000 and $29,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
(4) Of the $3.4 million of loans classified as nonaccrual at December 31, 2001,
$3.0 million relates to two commercial customers. Loans for one of these
customers are partially SBA-guaranteed.
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which management believes, based on its specific analysis of
the loans, do not present doubt about the collection of interest and principal
in accordance with the loan contract. Loans in this category must be
well-secured and in the process of collection. These loans are monitored closely
by BNC lending and management personnel.
Nonaccrual loans include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due unless the loan is well-secured and in the
process of collection. When a loan is placed on nonaccrual status, accrued but
uncollected interest income applicable to the current reporting period is
reversed against interest income of the current period. Accrued but uncollected
interest income applicable to previous reporting periods is charged against the
allowance for credit losses. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. When a problem loan is finally resolved, there may ultimately be an
actual write down or charge-off of the principal balance of the loan which may
necessitate additional charges to earnings. As noted above, of the $3.4 million
of loans in this category at December 31, 2001, $3.0 million relates to two
commercial customers and loans for one of these customers are partially
SBA-guaranteed.
Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of its
original principal will occur.
Other real estate owned and repossessed assets represents properties and other
assets acquired through, or in lieu of, loan foreclosure. Such properties and
assets are included in other assets in the balance sheets. They are initially
recorded at fair value at the date of acquisition establishing a new cost basis.
Write-downs to fair value at the time of acquisition are charged to the
allowance for credit losses. After foreclosure, valuations are periodically
performed by management and the real estate or assets are carried at the lower
of carrying amount or fair value less cost to sell. Write-downs, revenues and
expenses incurred subsequent to foreclosure are charged to operations as
recognized / incurred.
Potential Problem Loans. In accordance with accounting standards, the Company
identifies loans considered impaired and the valuation allowance attributable to
these loans. Impaired loans generally include loans on which management
believes, based on current information and events, it is probable that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific reserve allowance.
BNC generally considers all loans risk-graded substandard and doubtful as well
as nonaccrual and restructured loans as impaired. Impaired loans at December 31,
2001, not including the past due, nonaccrual and restructured loans reported
above, totaled $11.6 million. A significant portion of these loans are not in
default but may have characteristics such as recent adverse operating cash flows
or general risk characteristics that the loan officer feels might jeopardize the
future timely collection of principal and interest payments. The ultimate
resolution of these credits is subject to changes in economic conditions and
other factors. These loans are closely monitored to ensure that the Company's
position as creditor is protected to the fullest extent possible.
Allowance for Credit Losses. The Company maintains its allowance for credit
losses at a level considered adequate to provide for an estimate of probable
losses related to specifically identified loans as well as probable losses in
the remaining loan and lease portfolio that have been incurred as of each
balance sheet date. The loan and lease portfolio and other credit exposures are
reviewed regularly to evaluate the adequacy of the allowance for credit losses.
In determining the level of the allowance, the Company evaluates the allowance
necessary for specific nonperforming loans and also estimates losses in other
credit exposures. The resultant three allowance components are as follows:
Specific Reserve. The amount of specific reserves is determined through a